Goldman Warns Fed Chair Nomination Could Take 3 Months

Goldman, in line with consensus and PaddyPower, now expects the President to nominate Janet Yellen to be the next Federal Reserve Chair and despite comments yesterday from thw White House, they expect the announcement to come soon. However, this week's political calendar may be too crowded to make an announcement. Assuming a government shutdown is avoided, an announcement could come as soon as early next week; but they note the President's schedule may force an announcement to the following week. The risk of a failed confirmation vote appears very low to them but with the debt ceiling debate and concerns over delays due to fears over asset-purchases, Yellen may not be confirmed before the December FOMC meeting. The following Q&A answers most of the critical questions.

Via Goldman Sachs,

The Senate is apt to begin considering the nomination within a few weeks of the announcement. This will include a public hearing in the Senate Banking Committee, and probably questions in writing for the nominee. Both steps are likely to include substantive discussion of monetary policy.

Two votes will be held on the nomination. First, the Senate Banking Committee will vote, probably in November or December. Assuming Yellen is nominated, she is likely to receive unanimous Democratic support on the committee, which would be sufficient to move the issue to the full Senate, where a vote on confirmation seems unlikely until January 2014. While Yellen's nomination might not receive a great deal of support from Senate Republicans, at this point the likelihood of confirmation appears very high.

President Obama appears likely to announce his intentions regarding the next chair of the Federal Reserve soon. At this point, we expect the President to nominate Fed Vice Chair Janet Yellen, and believe the announcement will come fairly soon.

Q: Who will the President nominate to serve after Chairman Bernanke's term expires?

A: While nothing is certain until it is announced, there doesn't seem to be much doubt that Yellen will be nominated. Shortly after the White House announced that Larry Summers had withdrawn his name from consideration, it was unclear who the President might choose. However, at this point Janet Yellen once again appears to be the overwhelming favorite for the position. The White House sent signals in the press last week that Yellen was under serious consideration, and the White House has been laying the political groundwork in the Senate for her eventual nomination, to avoid the possibility of any negative surprises after the nomination has been announced.

Q. When will the announcement be made?

A: The formal announcement could come as soon as next week. Assuming that the President has made his decision, he is likely to want to announce it soon, in our view. Getting an announcement out quickly faces two challenges, though. First, the White House will want to fully "vet" its nominee, which can take time, though in Yellen's case the fact that she went through this process ahead of her nomination in 2010 should limit the amount of time this takes.

Second, the calendar is crowded with other political distractions. An announcement this week seems unlikely because the President is attending meetings around the UN general assembly in NY at the start of this week (September 23-24), and later this week headlines are likely to be dominated by the threat of a government shutdown if Congress does not extend spending authority by Monday, September 30. Assuming that spending authority is extended past September 30 and a shutdown is avoided, an announcement October 1 or 2--early in the weekly news cycle--might make the most sense (it also is worth noting that Yellen has cancelled a speech planned for October 1 hosted by the Economic Club of New York). The President is scheduled to attend meetings in Asia October 6 to 12, so if the announcement is not made next week, it might have to wait until mid-October.

Exhibit 1: Nominating and Confirming a Federal Reserve Chair Could Take Three Months

Q: What follows the President's announcement?

A: Once the nomination has been announced, the White House will transmit the formal nomination to the Senate, probably a few weeks later (teh chart above illustrates the chronology of prior Fed Chair nominations). The Senate Banking Committee is apt to hold a hearing a week or two after the White House sends the papers. If we are correct about the timing of the announcement, this would probably imply a hearing in early November, shortly after the debt limit has been raised and the FOMC's October 29-30 meeting. Typically the committee will not vote on the nomination until several weeks after the hearing, while it waits for the nominee to answer additional questions in writing. To be reported to the full Senate for consideration, a simple majority of the committee needs to support the nomination. There are 12 Democrats and 10 Republicans on the Banking Committee.

Q: Does the Fed's recent decision not to taper have any bearing on the confirmation process?

A: Some commentary has suggested that the FOMC's decision against tapering asset purchases will pose a challenge to Yellen's confirmation, but we disagree. We doubt that members of Congress who are skeptical of asset purchases will try to hold Yellen directly accountable for decisions made by the FOMC. Also, Yellen seems likely to get unanimous support from Democrats on the Banking Committee, so while committee Republicans will probably question her extensively on the Fed's balance sheet, her nomination would probably not be reliant on their support to get out of committee. The vote in the full Senate on confirmation would be more important since this would require some Republican support (see below) but that vote probably would not occur until January. We expect the Fed to announce that it will begin tapering asset purchases by $10bn at its December 17-18 meeting, so to the extent the Fed's stance on asset purchases did pose a problem, it will probably change before the critical vote takes place.

Q: Is there any risk that the Senate could block the nomination?

A: The risk of a failed confirmation vote appears very low to us. Assuming Yellen's nomination is reported favorably by the committee to the full Senate, two votes would occur. First, the Senate will vote on "cloture" to limit debate on the nomination which requires 60 affirmative votes. (this preemptively avoids a filibuster and has become standard practice on almost all significant matters). The Senate would then vote on the nomination itself, which requires only a simple majority (51 votes). At this stage it appears likely that, at a minimum, a sufficient number of Republicans would lend support on procedural votes to move Yellen's nomination forward, and at least a few seem likely to vote in favor of her confirmation as well.

Yellen's nomination for Vice Chair in 2010 received some Republican support on the Banking Committee, which approved the nomination by a 17-6 vote, though there has been substantial turnover in the committee's Republican membership since then. The Senate confirmed her that year by voice vote, so there is no detailed record of how much support she received from the broader Senate.